1. What you are really buying when you buy a share

Theory 1: How the market really works

You own 100 shares in a company. A year later you still own 100 shares, you have not sold a single one, and yet you own less of the company than you did before.

This is not a mistake and it is not a scam. It is arithmetic. And understanding it is the difference between reading a financial headline with judgment and swallowing it whole.

What a share actually gives you

A share is a fraction of the ownership of a company. It gives you three things:

• A portion of the profits, if they are distributed: the dividend.
• A proportional vote on major decisions.
• A claim on whatever is left if the company is wound up, once employees, suppliers and banks have been paid.

So far, nothing you did not already know. What tends to be far less clear is that the 'number of shares' defining your ownership percentage is not a fixed figure. It changes constantly, and it changes by decision of the company itself.

When new shares appear: dilution

The share count rises through a capital increase. The company issues new shares and sells them, usually to raise fresh cash without taking on debt.

For you, the effect has a name: dilution. If you owned 1% of the company and 20% more shares are issued, your 1% now comes to less than 1%. You have not sold anything. There are simply more slices sharing out the same pie.

When shares disappear: the buyback

The count falls through a share buyback: the company uses its own cash to buy shares on the open market and retire them from circulation.

A buyback changes nothing about the real business. Not one extra customer, not one extra factory. But it does change the arithmetic: if the same profit is divided among fewer shares, earnings per share (EPS) rises automatically.

That is why many mature companies, with modest growth and plenty of cash, prefer to buy back shares rather than raise the dividend. It is another way of returning value to shareholders. And also an easy lever for improving 'per share' metrics without the underlying business having improved one bit.

The practical reading: when you see that a company has beaten earnings-per-share expectations, check whether what rose was the numerator or what fell was the denominator.

Not all shares carry the same weight

Some companies list with several share classes, typically Class A and Class B. Identical economic rights — profits, dividends — but different voting rights.

The usual arrangement is for founders to keep a class carrying ten votes per share while the public buys the one-vote class. That way they retain control of the company while holding a minority of the capital.

And of all the shares outstanding, only a portion is genuinely available to buy and sell on the open market: the free float. Those held by founders, executives, governments or long-term strategic stakes usually sit outside it.

This matters more than it sounds. As we will see in the next module, it is the free float, and not the total share count, that indices such as the S&P 500 use to weight each company.

Where you stand in the queue if things go wrong

A company funds itself by combining equity (what shareholders put in) and debt (what banks and bondholders lend).

If the company is liquidated, it pays out in this order, without exception:

• First, employees and certain taxes.
• Then bondholders and banks.
• And last of all, if anything is left, shareholders.

That ranking is the structural reason why shares are almost always a riskier asset than the bonds of the same company. And also why they offer, in exchange, a higher expected return over the long run: the market demands a risk premium from whoever agrees to be paid last.

Why being listed changes everything

A private company can have shareholders, general meetings, even profit distributions. What it lacks is a public market for those shares. Without one it is almost impossible to know what they are really worth at any moment, or to find a buyer if you need cash quickly.

A listed company solves both problems at once: a public price, updated in real time, and a way to buy or sell within seconds through any broker.

That combination is precisely what makes possible everything that comes later in this course, from understanding why the price moves to automating a strategy on top of it. An algorithm can only operate on something that has a price to keep updating.